A Health & Welfare Trust (HWT) is a tax-free vehicle for financing a corporation’s healthcare costs for their employees. They were introduced in 1986 by Canada Revenue Agency(CRA) in their interpretation bulletin entitled IT-85R2.  This bulletin, entitled “Health & Welfare Trusts for Employees”, opened the door for the first ever savings model for healthcare expense financing in Canada.

Overview

One or more employees may be covered under a HWT.   A HWT is a specific trust that satisfies certain requirements as set out in CRA guidelines (specifically paragraph 6 of the Interpretation Bulletin IT-85R2 – Health and Welfare Trusts for Employees)

These requirements are as follows:

(a) The funds of the HWT cannot revert back to the employer or be used for any purpose other than providing the health and welfare benefits for which the contributions are made;

(b) The employer’s contributions to the fund must not exceed the amounts required to provide the benefits;

(c) The payment made by the employer cannot be made on a voluntary or gratuitous basis. In other words, once the payment plan is established it cannot change during the policy year. The contributions must be enforceable by trustees should the employer decide not to make the payments required;

(d) The trust is a legal arrangement between the employer, a third-party acting as the administrator and an independent trustee. The expenses to be paid out of the trust must qualify as medical expenses as defined by CRA (specifically subsection 118.2(2) of the Act).

Taxation

The basic rule regarding taxes as per Canada Revenue Agency(CRA) guidelines (specifically Paragraph 6(1)(a) of the Act) provides that an employee must include in the employee’s income (from employment for a taxation year) the value of all benefits received or enjoyed by the employee in the year of his or her employment. However, as per the CRA (specifically IT 85R2, paragraph 8),

“……contributions to a health and welfare trust by an employer using the accrual method of computing income are deductible in the taxation year in which the legal obligation to make the contributions arose.”

Furthermore, as per IT 85R2, paragraph 9c) …

“Benefits provided to an employee under a private health services plan are also not subject to tax. Therefore employer contributions to the HWT are considered non-taxable benefits to the employees.”

The basic rules above will apply to individuals providing services as an employee to an employer whether the employer is a corporation, an individual or a partnership. The level of coverage must be reasonable relative to the services provided.

In summary, in the case of an HWT:

1 – Reasonable contributions into the HWT are tax deductible by the corporation

2 – The net amount contributed can be spent by the employees and their dependants for medical expenses on a tax free basis

Participation

A corporation may provide benefits under a HWT to an individual who is both an employee and a shareholder of the corporation. These benefits may be received for income tax purposes by the individual in his or her capacity as an employee or as a shareholder.

The tax consequences will be different from the basic rules described above if corporate employer paid benefits are received by an individual in his or her capacity as the shareholder. A taxable shareholder benefit would arise to that individual. The contributions will not be deductible to the corporation. It is a question of fact as to whether these benefits are received for income tax purposes by the individual in his or her capacity as an employee or as a shareholder.

 Insurance

As per paragraph Canada Revenue Agency (CRA) guidelines (specifically – section 7 of IT 428) it is not necessary for the HWT to be a contract of insurance – the plan must be one that is based on insurance principles. The principle is that funds must be accumulated in the hands of trustees or in a trust account calculated to be sufficient to meet anticipated needs.

Funding

The employer shall make contributions to the Trust for a “plan year” in an amount, which together with employee contributions, if any, are required to provide the benefits under the plans to eligible employees of the employer and their dependants. Each employee shall be allocated a “plan year” not to exceed twelve months. The amount contributed must be reasonable given the employment services performed by the employee.

The employer’s contribution into the HWT must not exceed the amounts required to provide benefits. The contribution amount is an annual declaration and the amount cannot be amended during the twelve month policy year unless there is a life change (i.e. change in dependant requirement – Birth or Death or addition of a dependant) within the employee’s household unit. In addition, the trustee can enforce the employer to make the contributions during the policy year.

At the start of a subsequent policy year, a new contribution level is set. If the amount spent is less than the contribution amount, the unused amount can be carried forward into the following year. As well, if a medical expense was incurred in excess of the amount contributed, the un-reimbursed claim can be carried forward and the contribution in a subsequent year can be used to reimburse the employee.

Eligible Expenses 

For a list of eligible expenses, visit the making claims section of this site.